OWNING A CAR: LUXURY OR NECESSITY?

Phil. Star Business

By: Ven V. Martelino

(Mr. Ven Martelino is the Vice President and Head of

Consumer Lending Group for Visayas & Mindanao of Asia
United Bank)

Time was when buying a car was considered a luxury, saving

all the money one can earn to afford a vehicle that cost a
lowly five-figure level at that time. Today, in spite of the
astronomical cost of vehicles, one cannot help but be
amazed at the ever-increasing car sales that contribute to
the growing traffic problem not only in Metro Manila but in
key provincial cities as well.

To a large extent, the rapid increase in car ownership is

caused by the presence of a multitude of auto loan
providers. Banks have encroached into the once territory of
financing companies, extending credit to address an
individual's need to own a car. Competition has once again
compelled banks and financing companies to come up with
affordable rates, reasonable terms and innovative financing
packages, making the purchase of a car, a lot easier on the
pocket.

Before you take out a car loan, familiarize yourself with

some of the things that banks and financing companies
require and look for.

1. Downpayment - in general, the standard equity

requirement is 30% of the cost of unit. The higher the
downpayment the lesser the amortization will be.

2. Term - loan repayment period, which is usually from

12 to 48 months. Terms longer than this would be
more of an exception rather than a rule.
 3. Rates - interest rate is expressed on an "add on" basis,
which means that total interest is added to the principal
or loanable amount and divided by the term of the loan
to arrive at the monthly amortization.
4. Affordability - monthly amortization should be no
more than 30% of combined income of the borrower
and spouse.
5. Character - borrower should exhibit satisfactory credit
history.

It is a standard practice for car dealers to offer buyers

financing and other promotional schemes. These financing
schemes are normally "packaged" in coordination with banks
and financing companies. Some of these promotional offers
involve zero interest or low downpayment schemes. Zero
interest scheme basically means that the dealers pass on to
the bank or financing company the equivalent of the
discount they are giving their cash buyers. The bank or
financing company pays the dealer the discounted amount of
the car that the buyer/borrower wants to buy and assumes
the credit risk. For the dealers, this is no different from a
cash sale. For the bank or financing company, it is no
different from a regular car loan, since they get the
equivalent amount of interest by way of the discount.

On a selective basis, banks and financing companies may

also finance used or second-hand cars; but this requires a
higher downpayment and usually has shorter term. In
addition, a unit inspection is conducted to determine the
overall condition of the used car and its value. A car history
is likewise conducted to check and ascertain the validity of
the registration.

For the protection of the borrower and the bank's or

financing company's interest, a comprehensive car insurance
coverage is usually required with the bank or financing
company as the beneficiary or loss payee.
Mortgage is registered by the bank or financing company
with the appropriate government agency and duly annotated
in the certificate of registration with the Land Transportation
Office, all cost of which are for the account of the borrower.
One word of caution though: don't expect the bank or
financing company to take care of canceling the chattel
mortgage when you have fully paid up your car loan. What is
given to the borrower is a "release of mortgage" document,
which is needed to cancel the chattel mortgage.

Much like housing loans, the keen competition among banks

and financing companies in coming up with car loan
packages all the more makes it easier for the individual to
own a car.

And with the ease of availing credit for auto loan, owning a
car has ceased to be a LUXURY, but more of a NECESSITY